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There are numerous reasons for someone not making a Down Payment on the purchase of a property, such as;
- No Savings
- Prefer to use cash to pay off other debts
- Want to keep cash in other investments
- Want to do improvements to the property after purchase
- Will need to purchase furniture and appliances
While a Down Payment MIGHT lower your interest rate and reduce the amount being financed, equity in itself is not necessarily a good investment. Some common myths about Down Payment and Equity are:
- Equity in a home is liquid and will be there for you if needed: Have you ever known of a bank willing to lend a homeowner money based on equity when they are unemployed?
- You should always put as much money down as possible: Home equity only grows with appreciation of your home and has no relationship to the down payment. Have you ever heard of a bank that sent a check for interest on the down-payment?
- Substantial Equity Enhances your net worth:
Maybe, but it earns no return, sits idle, and will not grow to meet your retirement needs and other financial goals.
What are the other opportunities? Consider investing in a rental/income property!
There are three different types of $0 Down Payment Mortgages;
- 100% Financing Mortgages:
With these mortgages, you do not have to have any savings in your bank acount. The lender will finance 100% of the lesser of the purchase price of the property, or the appraised value.
If you have had some credit problems in the past, some lenders have 100% purchase mortgages that are not Canadian Mortgage & Housing Corporation (CMHC) insured and therefore there are fewer underwriting restrictions. If you have been discharged from a bankruptcy 2+ years ago and have 12 months of re-established credit, you would qualify for this program. And, the interest rates are very competitive.
If you have good credit, some of the lenders are now offering 100% purchase mortgages that offer excellent rates, usually about Prime.
- 107% Mortgage:
As the name implies, you can finance 107% of the purchase price of the property. 100% is used to pay the seller for thier property. 3% is Cash-Back you can use to pay for your closing costs or some other debt. And, the remaining 4% is lender's fee. This mortgage is not CMHC insured. You do need to have a very good credit score to qualify for this program. There are also some restrictions on where the property can be located, typically restricted to major towns or cities. Despite the risk of financing more than the property is worth, the interest rate is only about 1% above Prime.
- 95% + 5% Cash Back:
This CMHC insured mortgage product is also designed for clients with a very good credit score. Under this program, the lender will "give" you 5% of the purchase price on top of the 95% they will finance on the mortgage. There is a small interest rate premium for this kind of mortgage. And, if you pay off the mortgage before the end of the Term, you would have to repay the 5% Cash Back on a pro-rata basis. CMHC charges a 2.9% Insurance Premium/Fee on this product, which gets added to the mortgage on top of the purchase price. Because this mortgage is CMHC insured, the lenders are able to offer very attractive interest rates, typically right around Prime + 1%. You will have to prove you have 1.5% (of the purchase price) in your savings account to be used towards your Closing Costs. However, in reality, you will need about 3% of the selling price to cover all of your closing costs. Credits: www.bestinmortgage.com
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